SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 1-11859
PEGASYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2787865
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
101 Main Street
Cambridge, MA 02142-1590
(Address of principal executive offices) (zip code)
(617) 374-9600
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ____ X ____ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 28,420,000 shares of the Registrant's common stock, $.01 par value
per share, outstanding on April 30, 1997.
<PAGE>
PEGASYSTEMS INC. AND SUBSIDIARY
Index to Form 10-Q
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1996 3
and March 31, 1997
Consolidated Statements of Income for the three 4
months ended: March 31, 1996 and 1997
Consolidated Statements of Cash Flows for the three 5
months ended: March 31, 1996 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
<PAGE>
Form 10-Q/A Page 3 of 13
PEGASYSTEMS INC.
Consolidated Balance Sheets
(in thousands, except share-related amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
----------------- ------------------
<S> <C> <C>
Assets (As Restated)
Current assets:
Cash and cash equivalents $24,201 $ 75,021
Trade and installment accounts receivable, net of
allowance for doubtful accounts of $939 at December 31,
1996 and $1,426 at March 31, 1997 14,582 18,102
Prepaid expenses and other current assets 1,235 1,226
----------------- ------------------
Total current assets 40,018 94,349
Long-term license installments, net 23,802 26,104
Equipment and improvements, net 3,035 3,342
----------------- ------------------
Total assets $66,855 $123,795
================= ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,697 $ 6,059
Deferred revenue 53 39
Deferred income taxes 2,904 2,801
----------------- ------------------
Total current liabilities 5,654 8,899
----------------- ------------------
Deferred income taxes 8,816 9,513
----------------- ------------------
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value, 45,000,000 shares
authorized; 26,392,200 shares and 28,420,000 shares
issued and outstanding at December 31, 1996 and March
31, 1997, respectively 264 284
Additional paid-in capital 30,206 82,255
Deferred compensation (73) (68)
Retained earnings 22,022 22,990
Cumulative foreign currency translation adjustment (34) (78)
----------------- ------------------
Total stockholders' equity 52,385 105,383
----------------- ------------------
Total liabilities and stockholders' equity $66,855 $123,795
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Form 10-Q/A Page 4 of 13
PEGASYSTEMS INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
Three Months Ended
March 31,
1996 1997
------------ -------------
Revenue: (As Restated)
Software license $2,520 $5,815
Services 2,421 2,667
------------ -------------
Total revenue 4,941 8,482
------------ -------------
Cost of revenue:
Cost of software license 118 10
Cost of services 1,405 2,150
------------ -------------
Total cost of revenue 1,523 2,160
------------ -------------
Gross profit 3,418 6,322
------------ -------------
Operating expenses:
Research and development 1,604 2,586
Selling and marketing 974 2,693
General and administrative 389 605
------------ -------------
Total operating expenses 2,967 5,884
------------ -------------
Income from operations 451 438
License interest income 368 374
Other interest income 12 750
Interest expense (39) --
------------ -------------
Income before provision for income
taxes 792 1,562
Provision for income taxes 311 594
------------ -------------
Net income $ 481 $968
============ =============
Earnings per share:
Basic $0.02 $0.04
============ =============
Diluted $0.02 $0.03
============ =============
Weighted average number of common
shares outstanding:
Basic 23,490 27,497
============ =============
Diluted 25,118 29,490
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Form 10-Q/A Page 5 of 13
PEGASYSTEMS INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1997
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities: (As Restated)
Net income $ 481 $968
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Provision for deferred income taxes 501 594
Depreciation and amortization 374 361
Provision for doubtful accounts -- 400
Changes in operating assets and liabilities:
Trade and installment accounts receivable 1,223 (6,187)
Prepaid expenses and other current assets 83 9
Accounts payable and accrued expenses (777) 3,362
Deferred revenue 689 (14)
-------------- ---------------
Net cash provided by (used in) operating
activities 2,574 (507)
Cash flows from investing activities:
Purchase of equipment and improvements (221) (663)
-------------- ---------------
Net cash used in investing activities (221) (663)
Cash flows from financing activities:
Repayments of long-term debt (196) --
Issuance of common stock, net -- 51,943
Exercise of stock options -- 91
-------------- ---------------
Net cash provided by (used in) financing
activities (196) 52,034
-------------- ---------------
Effect of exchange rate on cash and cash equivalents (24) (44)
-------------- ---------------
Net increase in cash and cash equivalents 2,133 50,820
-------------- ---------------
Cash and cash equivalents, at beginning of period 511 24,201
-------------- ---------------
Cash and cash equivalents, at end of period $2,644 $75,021
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
Form 10-Q/A Page 6 of 13
PEGASYSTEMS INC.
Notes to Consolidated Interim Financial Statements
March 31, 1997
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements of Pegasystems Inc.
(the "Company") presented herein, as restated, have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. The Company suggests that these interim condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1996,
included in the Company's Annual Report to Shareholders filed with the
Securities and Exchange Commission.
Note B - Subsequent Event
The Company restated its consolidated financial statements for the unaudited
quarter ended March 31, 1997. The restatements reflect changes in the timing of
revenue recognition and expense on certain contracts and increased reserves for
revenue and doubtful accounts. In the opinion of management, all material
adjustments necessary to correct the financial statements have been recorded.
A summary of the impact of such restatements on the financial statements for the
unaudited three months ended March 31, 1997 is as follows:
Unaudited
Three Months Ended
March 31, 1997
Previously As
Reported Restated
------------------- -------------------
Software license revenue $6,478 $5,815
Services revenue 2,754 2,667
Total revenue 9,232 8,482
Income from operations 1,720 438
Net income 1,763 968
Earnings per share: Basic $0.06 $0.04
Earnings per share: Diluted $0.06 $0.03
Total assets $124,945 $123,795
<PAGE>
Form 10-Q/A Page 7 of 13
Note C - Net Income Per Share
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. In accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) No. 98, the Company has determined
that there were no nominal issuances of common stock or potential common stock
in the period prior to the Company's initial public offering (IPO). The Company
has applied the provisions of SFAS No. 128 and SAB No. 98 retroactively to all
periods presented. The net income amount for the three months ended March 31,
1997 reflects the restatement adjustments discussed in Note B. Calculations of
basic and diluted net income per share and potential common share are as
follows:
March 31,
1996 1997
----------- -------------
(in thousands, except per share data)
Basic
Net income $481 $968
=========== =============
Weighted average common shares outstanding 23,490 27,497
=========== =============
Basic earnings per share $0.02 $0.04
=========== =============
Diluted
Net income $481 $968
=========== =============
Weighted average common shares outstanding 23,490 27,497
Effect of:
Assumed exercise of stock options 1,628 1,993
----------- -------------
Weighted average common shares outstanding,
assuming dilution 25,118 29,490
=========== =============
Diluted earnings per share $0.02 $0.03
=========== =============
<PAGE>
Form 10-Q/A Page 8 of 13
PEGASYSTEMS INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
The Company restated its consolidated financial statements for the unaudited
quarter ended March 31, 1997. The restatements reflect changes in the timing of
revenue recognition and expense on certain contracts and increased reserves for
revenue and doubtful accounts. In the opinion of management, all material
adjustments necessary to correct the financial statements have been recorded.
Revenue
Total revenue for the three months ended March 31, 1997 (the "1997 Three Month
Period") increased 71.7% to $8.5 million from $4.9 million for the three months
ended March 31, 1996 (the "1996 Three Month Period"). The increase was primarily
due to an increase in software license revenue.
Software license revenue for the 1997 Three Month Period increased 130.8% to
$5.8 million from $2.5 million for the 1996 Three Month Period. The increase in
software license revenue was primarily attributable to software license
acceptances by new customers, software license agreement renewals, and extended
software usage by existing customers.
Services revenue for the 1997 Three Month Period increased 10.2% to $2.7 million
from $2.4 million for the 1996 Three Month Period. The increase in services
revenue was primarily attributable to increased implementation services for new
customers, additional consulting services provided to existing customers, and to
a lesser extent, increased maintenance revenue from a larger installed product
base.
Cost of Revenue
Cost of software license for the 1997 Three Month Period decreased 91.5% to
$0.01 million from $0.1 million for the 1996 Three Month Period, and decreased
as a percentage of total revenue from 2.4% for the 1996 Three Month Period to
0.1% for the 1997 Three Month Period. As a percentage of software license
revenue, cost of software license decreased from 4.7% for the 1996 Three Month
Period to 0.2% for the 1997 Three Month Period. Software development costs were
fully amortized during 1996 and no software development costs were capitalized
during the 1997 Three Month Period.
Cost of services for the 1997 Three Month Period increased 53.0% to $2.2 million
from $1.4 million for the 1996 Three Month Period. Cost of services as a
percentage of total revenue decreased from 28.4% for the 1996 Three Month Period
to 25.3% for the 1997 Three Month Period. This decrease was due to the growth in
the Company's total revenue.
<PAGE>
Form 10-Q/A Page 9 of 13
Cost of services as a percentage of services revenue increased from 58.0% for
the 1996 Three Month Period to 80.6% for the 1997 Three Month Period. This
increase was due to the use of the Company's service personnel to build
templates which can be reused in other customer applications.
Operating Expenses
Research and development expenses for the 1997 Three Month Period increased
61.2% to $2.6 million from $1.6 million for the 1996 Three Month Period. The
level of increase in research and development expenses reflects the Company's
strategy of leveraging existing product functionality by shifting its historical
investment in research and development to a more sales-oriented focus. As a
percentage of total revenue, research and development expenses declined from
32.5% for the 1996 Three Month Period to 30.5% for the 1997 Three Month Period
due to the growth in the Company's total revenue.
Selling and marketing expenses for the 1997 Three Month Period increased 176.5%
to $2.7 million from $1.0 million for the 1996 Three Month Period. As a
percentage of total revenue, selling and marketing expenses increased from 19.7%
for the 1996 Three Month Period to 31.7% for the 1997 Three Month Period. These
increases were primarily attributable to the hiring of additional direct sales
and marketing personnel, increased investment in marketing support activities
and materials, additional trade show activities, preparations for the Company's
User Meetings, and the opening of the Company's Sydney, Australia office.
General and administrative expenses for the 1997 Three Month Period increased
55.5% to $0.6 million from $0.4 million for the 1996 Three Month Period due to
increased investment in the infrastructure needed to support the Company's
accelerated growth. General and administrative expenses declined as a percentage
of total revenue from 7.9% for the 1996 Three Month Period to 7.1% for the 1997
Three Month Period due to the growth in the Company's total revenue.
License Interest Income
License interest income which is the portion of all license fees due under
software license agreements which was not recognized upon product acceptance or
license renewal increased 1.6% from $368,000 million for the 1996 Three Month
Period to $374,000 million for the 1997 Three Month Period due to the increase
in the Company's installed customer base.
Provision for Income Taxes
The provisions for federal, state and foreign taxes were $0.3 million and $0.6
million for the 1996 Three Month Period and the 1997 Three Month Period,
respectively. The effective tax rate decreased from 39.3% for 1996 Three Month
Period to 38.0% for the 1997 Three Month Period. This decrease was primarily due
to the reinstatement by the Internal Revenue Service of the research and
development tax credit in May 1996.
Liquidity and Capital Resources
Since its inception, the Company had funded its operations primarily through
cash flow from operations and bank borrowings. In July 1996, the Company issued
and sold 2.7 million shares of Common Stock in connection with its initial
public offering. Proceeds to the Company from such
<PAGE>
Form 10-Q/A Page 10 of 13
offering were approximately $29.4 million. In January 1997, the Company issued
and sold 1.8 million shares of Common Stock in connection with a second public
offering. Proceeds to the Company from such offering were approximately $51.9
million. At March 31, 1997, the Company had cash and cash equivalents of
approximately $75.0 million and working capital of approximately $85.5 million.
The Company's approach of charging license fees payable in installments over the
term of its licenses has historically deferred the receipt of cash and, prior to
its initial public offering, limited the availability of working capital.
Net cash used in operating activities for the 1997 period was $0.5 million,
primarily due to an increase in accounts receivable, mainly offset by an
increase in accounts payable and accrued expenses.
Net cash used in investing activities was $0.7 million during the 1997 Period
due to the purchase of property and equipment consisting mainly of computer
hardware and software and furniture and fixtures to support the Company's
growing employee base.
Net cash provided by financing activities was $52.0 million during the 1997
Period mainly due to the completion of the Company's second public offering.
The Company's capital commitments consist primarily of operating leases for
office space and equipment. At March 31, 1997, the Company's commitments under
non-cancellable operating leases for office space with terms in excess of one
year totaled $0.9 million, $1.1 million and $0.6 million for 1997, 1998 and
1999, respectively. The Company's total payments under such leases was $0.3
million for the 1997 Period.
The Company has a $5.0 million revolving credit line, which is unsecured and
expires on June 30, 1997. At March 31, 1997, the Company had no borrowings under
its revolving credit line. The Company's credit agreement prohibits the payment
of dividends, has profitability requirements and requires maintenance of
specified levels of tangible net worth and certain financial ratios.
The Company recorded bad debt expense of $0.4 million in the 1997 Period as a
result of indications that certain receivables relating primarily to consulting
and installation services rendered by the Company may not be collected in full.
The Company believes that the net proceeds from its two recent public offerings
together with cash generated by operations and availability under its bank
credit facility will be sufficient to fund the Company's operations for at least
the next year. However, there can be no assurance that additional capital beyond
the amounts currently forecasted by the Company will not be required or that any
such required additional capital will be available on reasonable terms, if at
all, at such time as required by the Company.
Inflation
Inflation has not had a significant impact on the Company's operating results to
date, nor does the Company expect it to have a significant impact in the future
due to the fact that the Company's license and maintenance fees are typically
subject to annual increases based on recognized inflation indexes.
<PAGE>
Form 10-Q/A Page 11 of 13
Forward-Looking Statements
Certain statements contained in this Form 10-Q/A are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
These statements involve various risks and uncertainties which could cause the
Company's actual results to differ from those expressed in such forward-looking
statements. These risks and uncertainties include the seasonal variation of the
Company's operations and fluctuations in the Company's quarterly results, rapid
technological change involving the Company's products, delays in product
development and implementation, the technological compatibility of the Company's
products with its customers' systems, the Company's dependence on customers in
the financial services market, intense competition in the markets for the
Company's products, risk of non-renewal by current customers, management of the
Company's growth, and other risks and uncertainties. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," and "should" and
similar words and expressions are intended to identify the forward-looking
statements contained in this Form 10-Q/A. These statements are based on
estimates, projections, beliefs, and assumptions of the Company and its
management and are not guarantees of future performance. Further information
regarding those factors which could cause the Company's actual results to differ
materially from any forward-looking statements contained herein is included in
the Company's filings with the Securities and Exchange Commission.
<PAGE>
Form 10-Q/A Page 12 of 13
PEGASYSTEMS INC.
Part II - Other Information:
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None
<PAGE>
Form 10-Q/A Page 13 of 13
PEGASYSTEMS INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pegasystems Inc.
Date: April 15, 1998 /s/ Ira Vishner
-----------------------------------
Ira Vishner
Vice President, Corporate Services,
Treasurer, Chief Financial Officer
and Director
(principal financial officer and
chief accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 75,021
<SECURITIES> 0
<RECEIVABLES> 19,528
<ALLOWANCES> 1,426
<INVENTORY> 0
<CURRENT-ASSETS> 94,349
<PP&E> 6,151
<DEPRECIATION> (2,809)
<TOTAL-ASSETS> 123,795
<CURRENT-LIABILITIES> 8,899
<BONDS> 0
0
0
<COMMON> 284
<OTHER-SE> 105,099
<TOTAL-LIABILITY-AND-EQUITY> 123,795
<SALES> 8,482
<TOTAL-REVENUES> 8,482
<CGS> 2,160
<TOTAL-COSTS> 2,160
<OTHER-EXPENSES> 5,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,562
<INCOME-TAX> 594
<INCOME-CONTINUING> 968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 968
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.03
</TABLE>
